What is Residual Value?

What is Residual Value?

• A. Expected value of leased equipment at end of lease.
• B. Rate charged during lease.
• C. Initial cost of equipment.
• D. Tax treatment.

Answer: (A)

Residual value is the estimated market value of the equipment at the end of the lease term. This figure lets the lessor (and sometimes the lessee) know what the asset is expected to be worth after use, and it helps determine lease payments and any end-of-lease purchase option. It isn’t the lease rate or rent charged during the term, nor the initial purchase price of the equipment, and it isn’t about tax treatment. In many leases, there may be a guaranteed residual value—the minimum value the lessor expects the asset to have at lease end—which affects risk and pricing.

Residual value is the estimated market value of the equipment at the end of the lease term. This figure lets the lessor (and sometimes the lessee) know what the asset is expected to be worth after use, and it helps determine lease payments and any end-of-lease purchase option. It isn’t the lease rate or rent charged during the term, nor the initial purchase price of the equipment, and it isn’t about tax treatment. In many leases, there may be a guaranteed residual value—the minimum value the lessor expects the asset to have at lease end—which affects risk and pricing.